Contents

Abstract

This paper uses data collected from a sample of Micro, Small and Medium Enterprises (MSMEs) located in urban areas of five major districts in Zambia to investigate the role of switching costs and relationship banking among MSMEs when borrowing formal bank credit.

The authors find that MSMEs choice of the main-bank does not persist signalling the absence of switching costs and the vague role of relationship banking. Moreover, switching a main-bank has no effect on lending interest rates. Our results imply that MSMEs are not ’locked-in’ and long-term relationships between banks and MSMEs barely exist. Banks also don’t use discounts on lending interest rates to attract enterprises from competitor banks. These results point to the existence of asymmetric information as the main explanation for the occurrence of high interest rates and low volume of credit banks allocate to MSMEs. Therefore, they recommend strengthening relationship banking as a single opportunity to promote repeated interaction between banks and MSMEs and greater absorption of MSMEs ’soft’ information by commercial banks.

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